Why Referral Marketing is The Most Cost-Effective Customer Acquisition Strategy

Looking for new and effective marketing tactics for your company is an ongoing challenge. Referral marketing is an opportunity to utilize your engaged customers to generate new clients.

Referral marketing is low cost, boosts your social media visibility, and is a great revenue generator. To get you even more inspired, here’s an example of referral marketing as an insanely effective strategy: DropBox achieved 3900% growth with a referral program and got 4 million users in just 15 months.

We’ve collected 7 more reasons backed up with statistics, researches and examples why referral marketing is your best customer acquisition strategy.  

1. Referred Clients Generate Higher Revenue & ROI

Referral marketing attracts qualified customers who are more likely to make purchases, which helps companies see a longer duration of revenue growth. Statistically, companies with referral campaigns saw 86% more revenue growth over two years.

According to a study conducted in Wharton Business School, referred customers, on average, were 4.5 cents more profitable per day than any other customers. In addition, the customer acquisition cost (CAC) for these customers was $23.12 less than non-referred customers. If you consider the initial reward over a six-year span, then referred customers have a 60% increase in return on investment (ROI).

In fact, ROI from a referral program can be as high as 10x for Enterprise companies – here is average ROI we see our clients get depending on their size:

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2. Referral Marketing Is More Cost-Effective

This is potentially one of the biggest reasons companies should do refer-a-friend campaigns. Unlike many other marketing channels, referral marketing is affordable and effective.

If you’re trying to grow your business, one of your goals is to build an active customer base. A common problem that businesses run into is figuring out how to bring down their customer acquisition cost (CAC). Unlike traditional marketing channels, referral marketing has a lower CAC because it makes use of your current customers who help spread the word. Another advantage is that the cost is fixed and predictable.

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Average cost per action on in Facebook ads is $18.68 and continue to increase over the years (WordStream)

Let’s keep in mind that referred customers usually refer more customers themselves. This way,  referral marketing, helps businesses acquire higher quality customers at a lower cost.

3. Referred Customers Have a Longer Lifetime Value

Rewarding your existing customers who are advocates of your brand makes them want to do something nice in return. They feel obliged to provide you with quality referrals who are likely to become additional worthy customers. Plus, if you reward your brand advocates who make referrals, they are 54% more likely to make another purchase.

Customers referred by friends are prone to trust the company more and are four times more likely to buy. Moreover, they tend to spend 25% more and have a 34% higher average order value than other consumers obtained by other media.

Referred customers are also more likely to make repeat purchases.  

As a result, referred customers have at least a 16% higher lifetime value (LTV) than non-referred ones.

One of our clients, RhinoShield, an international cell phone case retailer, has 17.3% of referred traffic converted into making a purchase. You can read the full case study here.

4. Referred Customers Are More Loyal

Acquiring customers through a referral marketing program results in gaining more loyal customers than through traditional marketing channels.  

A study conducted by Wharton Business School revealed that:

  • customers who received a reward had lower turnover than customers who did not receive a reward;
  • the referred customer retention rate was 18% lower than with non-referral customers (this rate was not only higher but also did not diminish over time);
  • after 33 months, referred customers had an 82% probability of remaining continually active customers.

Referred friends were also found to have a much stronger commitment to a brand within a shorter time period. The State of Referral Marketing found that 78% of surveyed respondents suggested that referred customers are more loyal than customers acquired from other marketing channels. Probably that’s because they feel a stronger attachment to the company their friends share a bond to as well.

5. Referral Marketing Is a Trusted Channel

In the digital era, consumers behaviors have shifted to doing more pre-purchase research. Consumers are more skeptical and are checking prices online and reading reviews.

This is where referral marketing comes to the rescue. It is one of the most consumer-trusted channels and can help them choose your brand among your competitors.

“Referral marketing has given a voice to our existing members in an attributable and quantifiable way, that’s better than just word of mouth” — John Sullivan, WHOOP Fitness, VP of Marketing.

WHOOP is a Talkable client and now has 7% of subscriptions sign-ups from their referral program.

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Referral marketing is a highly trusted channel because consumers are hearing about a brand from someone they know personally. In fact, 90% of consumers say that they trust word-of-mouth recommendations from friends and family above all other forms of advertising.

6. Referral Marketing May Be Something Your Competitors Are Not Doing

Despite all the benefits of referral marketing, statistics show that only 30% of businesses have a formal referral program. Let us look into the most common reasons why.

One of the most widespread misconceptions about referral programs is that they require custom software development to be implemented. That is not true. Most referral platforms are easily integrated into current systems, you just need professional help with setting it up.

Another reason companies are being cautious with referrals is that they worry about fraud detection. Indeed, it can be problematic but it is not unsolvable. With the help of experts, it can be easily taken care of.

Here’s feedback from one of our customers — Griffin Thall, CEO of Pura Vida Bracelets:

“Fraud is so rampant in the referral space and we take solace knowing that Talkable is the authority on preventing it from happening. When we see a report that shows stellar results, we know it’s true! We couldn’t imagine a better partner in helping us be successful.”

These worries put aside, now you can concentrate on how you can stand out from your competitors. By using referral campaigns, your company can start to offer additional value to customers in the form of discounts.

7. Referral Marketing Boosts Social Media Visibility

Referral marketing is a super social media friendly channel. Referral offers usually include social media sharing buttons, which make it simple for your community of customers to push a refer-a-friend campaign to their more extensive networks.

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Besides, referral marketing helps build social proof for your business. When an advocate shares their referral code on social media, their social network sees the offer and checks out your company. This helps to build up your businesses’ credibility. Not to mention, referral marketing is a non-invasive way to promote your brand.

We hope that these reasons on why your company should use referral marketing have inspired you to start your own campaign. In case you need help with that, feel free to contact us at any time.